The paper 'Roles of the Government in a Market Economy" is a good example of macro and microeconomics coursework. In a free-market economy, all activities in the economy are determined by forces of demand and supply with no control of the government. The buyers and sellers are allowed to transact freely based on a mutual agreement about the price with no government intervention in terms of subsidies or taxes. However, in the real world, it is no economy that can operate without the intervention of the government. This is due to the market failures which would mean that public goods are not provided, there is the overconsumption of demerit goods such as alcohol and cigarettes, there is no provision of merit goods such as schools and hospitals and monopolies would exploit customers.
In general, there is a need for the government to intervene so as to regulate market transactions (Kates, 2011). The following are roles of the government in a market economy: Controlling the labour market using Minimum Wage The main aim of the employers is to maximize profit while minimizing cost.
They seek to reduce all costs of production including the cost of labour. For this reason, the government comes in to protect these workers who cannot be able to support themselves with such low wages. The government intervenes by setting minimum wage which is the lowest wages that an employer can pay an employee. The minimum wage is a wage set above the equilibrium wage. Equilibrium wage is determined where the supply of labour is equal to the demand for labour. When the minimum wage is set above the market equilibrium, it would mean that the supply of the willing labour force is more than what the producers are demanding (Karam, 2011).
This is as illustrated in the diagram below: Correcting Market A market failure occurs when a free market fails to efficiently allocate resources. Some of the market failures include: Inefficient production and allocation where markets fail to efficiently produce and allocate resources(Salanié , 2000). Monopoly power where markets fail to control exploitation by the monopoly firms Missing markets -these are markets that fail to form and are therefore unable to meet the wants and needs of the public such as providing roads, public roads, street lights and defence (Salanié , 2000). Incomplete markets- these are markets that fail to provide adequate merit goods such as healthcare and education (Salanié , 2000). De-merit goods where markets may fail to control the production and sale of goods like alcohol and cigarettes which have no less merit to consumers (Salanié , 2000). Negative externalities- this is a situation where the transactions between consumers and producers affect third parties who are not part of the transaction.
An example is a water and air pollution by industries to the surrounding community who may not even be users of that product (Salanié , 2000). Property rights-markets work efficiently when producers and consumers have the right to own property.
Failure to assign consumers the right to own property limits the market formation ability (Salanié , 2000). Information failure where markets fail to give adequate information to the other party during a market transaction (Salanié , 2000). Unstable markets- at times markets are very unstable which makes it impossible to have a stable equilibrium such as with foreign exchange, credit markets and agricultural markets.
This instability requires government intervention (Salanié , 2000). Inequality-markets may also fail to bridge the gap between the low-income earners and high-income earners. Market transactions reward producers and consumers with profits and income but they may only be concentrated on the hand of the rich (Salanié , 2000).
Economicsonline (2013) Types of market failure. Retrieved on 16th March 2013 from http://www.economicsonline.co.uk/Market_failures/Types_of_market_failure.html
Karam G (2011) Are the Proposed Minimum Wages Too High? Retrieved on 16th March 2013 from http://www.yalibnan.com/2011/12/23/are-the-proposed-minimum-wages-too-high/
Kates S (2011) Free Market Economics: An Introduction for the General Reader. Edward Elgar Publisher: UK
Salanié B (2000) The Microeconomics of Market Failures.4TH edition, library of congress: USA
Lane, Philip (2003) "Business Cycles and Macroeconomic Policy in Emerging Market Economies "International Finance, 6 (1), pp. 89-108
Yakhin, Yossi (2008) "Financial Integration and Cyclicality of Monetary Policy in Small Open
Economies," Monaster Center for Economic Research Discussion Paper No. 08-11
Mankiw G (2009) principles of macroeconomic, 2nd Edition, Harcourt Brace Publishers: USA
Galbraith (2010) A theory of price control, 3rd Edition: Harvard University Press